PEPPERDINE UNIVERSITY
CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2018 and 2017
TABLE OF CONTENTS
Report of Independent Auditors ... 1 Financial Statements:
Consolidated Statements of Financial Position... 2 Consolidated Statements of Activities ... 3 – 4 Consolidated Statements of Cash Flows ... 5 Notes to Consolidated Financial Statements... 6 – 33
Report of Independent Auditors
To the Board of Regents of Pepperdine University
We have audited the accompanying consolidated financial statements of Pepperdine University (the
“University”), which comprise the consolidated statements of financial position as of July 31, 2018 and July 31, 2017, and the related consolidated statements of activities and of cash flows for the years then ended.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America;
this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the University’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pepperdine University as of July 31, 2018 and 2017, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
November 28, 2018
PricewaterhouseCoopers LLP, 601 South Figueroa Street, Los Angeles CA 90017 T: (213) 356-6000, F: (813) 637-4444, www.pwc.com
(In thousands)
2018 2017
ASSETS
Cash and cash equivalents……… $ 148,113 $ 144,456 Student receivables, less allowance for
doubtful accounts of $1,587 and $1,460, respectively… 2,562 1,587
Other accounts receivable……….. 6,547 5,953
Prepaid expenses, inventories, and other assets………… 4,862 4,126 Student loans, less allowance for
loan losses of $1,578 and $1,466, respectively………… 19,516 20,621 Beneficial interests and contributions receivable, net…… 38,122 31,909
Investments……… 1,147,769 1,034,457
Assets held as trustee or agent……… 118,853 113,273 Property, facilities, and equipment, net…………...……… 444,814 389,976
Total assets……….. $1,931,158 $1,746,358
LIABILITIES AND NET ASSETS Liabilities:
Accounts payable and accrued liabilities……… $ 32,490 $ 28,856
Accrued salaries and wages………..……… 4,052 4,093
Student deposits, advance payments, and
deferred revenue………..……… 10,099 13,925
Asset retirement obligations………..……… 6,757 6,506
U.S. government-funded student loans…………...…… 13,188 15,495
Trust and agency obligations……… 67,500 71,086
Other long-term obligations……… 3,233 3,233
Long-term bonds payable, net……… 425,989 305,939
Total liabilities……….. 563,308 449,133
Net assets:
Unrestricted………. 828,530 798,831
Temporarily restricted………..……… 129,423 115,569
Permanently restricted………..………… 409,897 382,825
Total net assets………. 1,367,850 1,297,225
Total liabilities and net assets……… $1,931,158 $1,746,358
See accompanying notes to consolidated financial statements.
2
- -
(In thousands)
Temporarily Unrestricted Restricted REVENUES AND OTHER SUPPORT
Student tuition and fees………...…………
Less student aid………
Net student tuition and fees……….……
$ 362,808 (113,321)
249,487
$ -
- - Room and board……….………
Endowment support……….………
Private gifts and grants……….………
Government grants……….………...…
Sales and services………...………
Other revenue………
Net assets released from restriction………..……
Total revenues and other support………
38,580 40,523 10,471 3,397 7,065 9,188 4,914 363,625
- - 5,662
14 - 50 (4,914)
812 EXPENSES
Instruction and research……….…
Academic support………..…
Student services……….
Management and plant operations………
Auxiliary enterprises………...……
Public service……….……
Fundraising………..………
Alumni relations and development………
Total expenses………...………
98,107 68,625 62,211 64,314 30,236 17,754 6,991 3,690 351,928
- - - - - - - - - Change in net assets before non-operating
revenues and expenses……….…… 11,697 812
NON-OPERATING REVENUES AND EXPENSES Actuarial adjustment of trust and agency obligations……
Investment income:
- 2,439
Dividends………...………
Interest……….…
Other……….……
Investment expenses………
Net realized and unrealized investment gains………
Foreign currency translation………
Other………
Total non-operating revenues and expenses………
7,534 6,128 11,579 (4,284)
6,362 (66) (9,251) 18,002
2,946 941 - (2,156)
5,748 - 3,124 13,042
Change in net assets……… 29,699 13,854
Net assets at beginning of year……….…
Net assets at end of year……….……
798,831
$ 828,530 $
115,569 129,423
See accompanying notes to consolidated financial statements.
Permanently
Restricted Total
$ - $ 362,808
- (113,321)
- 249,487
- 38,580
62 40,585
19,017 35,150
- 3,411
- 7,065
83 9,321
19,162 383,599
- 98,107
- 68,625
- 62,211
- 64,314
- 30,236
- 17,754
- 6,991
- 3,690
- 351,928
19,162 31,671
4,776 7,215
2 10,482
24 7,093
- 11,579
(6,440)
6,681 18,791
- (66)
(3,573) (9,700)
7,910 38,954
27,072 70,625
382,825 1,297,225
$ 409,897 $ 1,367,850
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(In thousands)
Temporarily Unrestricted Restricted REVENUES AND OTHER SUPPORT
Student tuition and fees………...…………
Less student aid………
Net student tuition and fees……….……
$ 350,208 (109,017)
241,191
$ -
- - Room and board……….………
Endowment support……….………
Private gifts and grants……….………
Government grants……….………...…
Sales and services………...………
Other revenue………
Net assets released from restriction………..……
Total revenues and other support………
36,592 39,914 10,516 3,736 6,451 6,436 17,469 362,305
- - 9,712
- - - (17,397)
(7,685) EXPENSES
Instruction and research……….…
Academic support………..…
Student services……….
Management and plant operations………
Auxiliary enterprises………...……
Public service……….……
Fundraising………..………
Alumni relations and development………
Total expenses………...………
95,764 58,838 56,288 56,803 28,496 16,066 7,002 2,898 322,155
- - - - - - - - - Change in net assets before non-operating
revenues and expenses……….…… 40,150 (7,685)
NON-OPERATING REVENUES AND EXPENSES Actuarial adjustment of trust and agency obligations……
Investment income:
- (2,962)
Dividends………...………
Interest……….…
Other……….……
Investment expenses………
Net realized and unrealized investment gains………
Foreign currency translation………
Other………
Total non-operating revenues and expenses………
5,848 1,467 12,544 (4,540) 47,832
216 (10,884)
52,483
2,374 529 - (2,204) 14,646
- (8,554)
3,829
Change in net assets……… 92,633 (3,856)
Net assets at beginning of year……….…
Net assets at end of year……….……
706,198
$ 798,831 $
119,425 115,569
See accompanying notes to consolidated financial statements.
Permanently
Restricted Total
$ - $ 350,208
- (109,017)
- 241,191
- 36,592
76 39,990
5,590 25,818
- 3,736
- 6,451
1,069 7,505
(72) -
6,663 361,283
- 95,764
- 58,838
- 56,288
- 56,803
- 28,496
- 16,066
- 7,002
- 2,898
- 322,155
6,663 39,128
(1,140) (4,102)
3 8,225
42 2,038
- 12,544
- (6,744)
8,817 71,295
- 216
2,479 (16,959)
10,201 66,513
16,864 105,641 365,961 1,191,584
$ 382,825 $ 1,297,225
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CASH FLOWS FROM OPERATING ACTIVITIES 2018 2017
Change in net assets………
Adjustments to reconcile change in net assets to net cash and cash equivalents provided by operating activities:
Depreciation and amortization………
Provision for doubtful accounts………
$ 70,625
20,806 200
$ 105,641
20,803 - Loss on early extinguishment of debt………
Non-cash gifts……….………
Actuarial adjustment of trust and agency obligations………
Contributions restricted for long-term investment………
Income restricted for long-term investment………
Premium received on issuance of long-term obligations………
Loss on disposal of property, facilities and equipment………
Net realized and unrealized (gains) losses on investments………
Change in assets and liabilities:
Student receivables………
Other accounts receivable………..………
Beneficial interests and contributions receivable………...………
Prepaid expenses, inventories and other assets……….………
Accounts payable and accrued liabilities……….………
Accrued salaries and wages………
Student deposits, advance payments and deferred revenue………
Net cash and cash equivalents provided by operating activities………
15 (11,896)
(7,215) (8,440) (63) 2,847
70 (54,150)
(1,175) (594) 734 (736) 1,233
(41) (3,607) 8,613
- (10,051)
4,102 (3,389)
(76) - 224 (105,751)
974 (2,803) 10,298
(360) (2,444) 400 2,956 20,524 CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investments………
Purchases of investments………
Purchases of property, facilities and equipment………
Student loans repaid………
Student loans issued….…..…...………
Net cash and cash equivalents used in investing activities………
206,922 (257,940)
(77,133) 3,716 (2,611) (127,046)
278,451 (242,475)
(46,535) 3,818 (3,508) (10,249) CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from contributions restricted for
long-term investment………
Income restricted for long-term investment………
Principal received on issuance of long-term obligations………
Principal payments on long-term obligations………
Net change in bond issue costs………
Increase (decrease) in U.S. government-funded student loans………
Investment activity on annuities………
Payment of trust and agency obligations………
Net cash and cash equivalents provided by (used in) financing activities………
10,442 63 145,870
(24,745) (84) (2,307) (2,149) (5,000) 122,090
3,899 76 - (3,135)
- 290 (1,599) (5,245) (5,714) Net change in cash and cash equivalents……… 3,657 4,561 Cash and cash equivalents at beginning of year………
Cash and cash equivalents at end of year……… $
144,456 148,113 $
139,895 144,456
See accompanying notes to consolidated financial statements.
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1. Nature of Operations
Pepperdine University (the “University”) is an independent private Christian university committed to the highest standards of academic excellence and Christian values, where students are strengthened for lives of purpose, service, and leadership. The University enrolls approximately 7,600 students in its five colleges and schools. Seaver College, the University’s undergraduate liberal arts college, the School of Law, and the School of Public Policy are headquartered on 830 acres in the Santa Monica Mountains overlooking the Pacific Ocean in Malibu, California. The Graduate School of Education and Psychology and the Pepperdine Graziadio Business School are headquartered at the University’s West Los Angeles, California graduate campus.
Mr. George Pepperdine, the founder of Western Auto Supply Company, established George Pepperdine College in 1937. He envisioned a college with the highest academic standards guided by the spiritual and ethical ideals of Christian faith. University status was achieved in 1970 with the addition of the graduate and professional schools. Through the generosity of Mrs. Frank Roger Seaver, the University’s Malibu campus of Seaver College opened in 1972. Since then, the Malibu campus expanded to include the School of Law in 1978, and the Drescher Graduate Campus in 2003.
The University operates several consolidated affiliated companies. All material transactions and balances between the University and its affiliates have been eliminated in consolidation.
2. Summary of Significant Accounting Policies Basis of Presentation
The accompanying Consolidated Financial Statements of the University are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to not-for-profit organizations. In preparing the Consolidated Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and revenues and expenses for the periods presented. Significant items which could be materially affected by such estimates include:
the allowance for doubtful accounts, the allowance for loan losses, beneficial interests and contributions receivable, investments, assets held as trustee or agent, accounts payable and accrued liabilities and trust and agency obligations. The University’s actual results could differ significantly from management’s estimates. Management also utilizes certain estimates based on square footage to allocate depreciation, interest expense, and central plant operations expense to the functional expense categories included on the Consolidated Statements of Activities.
New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This standard outlines a single comprehensive standard for revenue recognition across all industries and supersedes most existing revenue recognition guidance. In addition, ASU 2014-09 will require new and enhanced disclosures. ASU 2014-09, as amended, will become effective for annual reporting periods beginning after December 15, 2017. Management believes adoption will have a material impact on the financial statements.
In February 2016 the FASB issued ASU 2016-02, Leases. This guidance requires the recognition of rights and obligations arising from lease contracts, including existing and new arrangements, as assets and liabilities on the balance sheet. The guidance is effective for annual reporting periods beginning after
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December 15, 2018. Management believes adoption will have a material impact on the financial statements.
In August 2016 the FASB issued ASU 2016-14, Presentation of Financial Statements for Not-for- Profit-Entities. This guidance revises the not-for-profit reporting model. The guidance streamlines and clarifies net asset reporting, provides flexibility regarding the definition of reported operating subtotals, and imposes new reporting requirements related to liquidity and expenses. The guidance is effective for fiscal years beginning after December 15, 2017. Management believes adoption will have a material impact on the financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The standard addresses the classification of certain transactions within the statement of cash flows, including cash payments for debt repayment or debt extinguishment costs, contingent considerations payments made after a business combination, and distribution received from equity method investments. The guidance is effective for fiscal years beginning after December 15, 2018. The University is evaluating the impact this will have on its financial statements.
In June 2018, the FASB issued ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The FASB is issuing this Update to clarify and improve the scope and the accounting guidance for contributions received and contributions made. The amendments in this Update should assist entities in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transactions) within the scope of Topic 958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance and (2) determining whether a contribution is conditional. The guidance is effective for fiscal years beginning after December 15, 2018. Management believes adoption will not have a material impact on the financial statements.
Income Taxes
As a not-for-profit educational institution, the University is exempt from Federal and California income taxes under Section 501(c)(3) of the Internal Revenue Code, and Section 23701(d) of the California Revenue and Taxation Code (except for taxes on unrelated business income). Since the University’s unrelated business income for the years ended July 31, 2018 and 2017 was immaterial, no provision for income taxes has been made in the accompanying Consolidated Financial Statements.
Public Law 115-97, known as the Tax Cuts and Jobs Act (“TCJA”) was signed into law on December 22, 2017. The TCJA included several provisions that effected Internal Revenue Code Section 501(c)(3) tax-exempt organizations, such as Pepperdine University. Management has reviewed the provisions effecting tax-exempt organizations and has determined that the income tax impact is immaterial for the fiscal year ended July 31, 2018.
Net Assets
The University is required to classify its net assets into the following three categories according to donor-imposed restrictions or provisions of law:
Unrestricted net assets represent resources that are not restricted, either temporarily or permanently, by donor-imposed stipulations. They are available for support of all organizational operations and services.
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Temporarily restricted net assets represent contributions and other assets whose use is limited by donor-imposed stipulations. These restrictions are temporary in that they either expire by the passage of time or by the fulfillment of certain obligations of the University pursuant to those stipulations.
Permanently restricted net assets represent contributions and other assets whose use by the University is restricted by donor-imposed stipulations. These restrictions are permanent in that they neither expire by passage of time nor can they be otherwise removed by the University. Income from these assets can be unrestricted or restricted based on donor stipulations.
Revenue Recognition
Student tuition and fees and room and board are recorded as revenues in the period the services are rendered. Private gifts, including unconditional promises to give, are recognized as revenue in the period received and are reported as increases in the appropriate category of net assets. Conditional or contingent grant awards are not recorded as revenue until the conditions on which they depend have been substantially met. Grants received from departments or agencies of the government considered to be exchange transactions are not recorded as revenue until related costs are incurred. These revenues are subject to audit by government authorities. A receivable is recorded equal to the amount of expenditures incurred prior to the fiscal year end for which cash reimbursement has not been received. Endowment support, limited to the payout calculated under the Total Rate of Return methodology, is comprised of ordinary income and accumulated gains on endowment and quasi-endowment assets.
Concentrations of Financial Aid
A significant number of students attending the University receive financial assistance from U.S.
government student financial aid programs. These programs require the University to comply with record keeping, eligibility, and other requirements. Failure to comply with such U.S. government requirements could result in the loss of U.S. government financial assistance to the University’s students and adversely impact the operations of the University.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in checking and savings accounts, money- market funds, cash held by external trustees, and short-term investments with an original maturity of three months or less. Other short-term resources held by external investment managers are classified as investments.
Student Receivables
Student receivables are carried at cost, less an allowance for doubtful accounts.
Management uses available information to recognize losses on student receivables. Future additions to the allowance may be necessary based on changes in economic conditions and other factors.
Student Loans
Student loans are recorded at the contractual amounts owed by students adjusted for unamortized discounts, premiums, unearned income, undisbursed funds, deferred loan fees and the allowance for loan losses. Interest income is recorded on the accrual basis of accounting in accordance with the terms of the receivables, except interest accruals are discontinued when the payment of principal or interest is 90 or
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more days past due, or when repayment of principal and interest in full is doubtful. Payments received on delinquent loans are applied to the principal outstanding until the loan is restored to current status.
A student loan is impaired when it is probable that the University will be unable to collect all amounts due according to the contractual terms of the loan agreement. The measurement of impairment may be based on (i) the present value of the expected future cash flows of the impaired loan discounted at the loan’s original effective interest rate or (ii) the observable market price of the impaired loan. If the recorded investment of the loan exceeds the measure of impairment, an allowance is recorded in the amount of the excess. The University measures impairment by utilizing a discounted cash flow analysis.
The University’s income recognition policies for impaired loans are consistent with those for delinquent loans. All loans designated as impaired are either placed on delinquent status or are designated as restructured. Payments received on impaired loans are applied to the principal outstanding until the loan is returned to current status.
On an ongoing basis, management monitors the student loan portfolio and evaluates the adequacy of the allowance for loan losses. In determining the adequacy of the allowance for loan losses, management considers such factors as historical loss experience, known problem loans, assessment of economic conditions, and other appropriate data to identify the risks in the student loan portfolio. The amount of the allowance for loan losses is based on estimates and the University’s actual losses may vary from management’s estimates. Loans deemed by management to be uncollectible are charged to the allowance for loan losses. Recoveries on loans previously charged off are credited to the allowance for loan losses.
Provisions for loan losses are charged to expense and credited to the allowance for loan losses in amounts that are deemed appropriate by management based upon its evaluation of the known and inherent risks in the student loan portfolio. Future additions to the allowance may be necessary based on changes in economic conditions and other factors.
Beneficial Interests and Contributions Receivable
Beneficial interests and contributions receivable, including unconditional promises to give, are recognized as revenue in the period received and are reported as increases in the appropriate category of net assets based on donor-imposed restrictions. Beneficial interests and contributions receivable where donor restrictions are met in the same fiscal year as the beneficial interest and contribution receivable is made are reported as unrestricted support. Conditional promises to give are not recognized until they become unconditional, that is, when the conditions on which they depend are substantially met.
Beneficial interests and contributions receivable are recorded at their estimated fair value. Amounts to be received in future periods are discounted at a credit-adjusted interest rate.
Investments
Investments are stated at fair value and all related transactions are recorded on the trade date. The fair value of investments is based on quoted market prices from national security exchanges, except for alternative investments for which quoted market prices are not available. The fair value of certain alternative investments, which include limited partnerships in venture capital, real estate and other private debt and equity funds, is typically Net Asset Value (“NAV”) provided by the external investment managers or general partners, adjusted for receipts and disbursements of cash and distributions of securities if the date of valuation is prior to the University’s fiscal year end. Such valuations generally reflect discounts for illiquidity and consider variables such as financial performance of investments, recent sales prices of investments, and other pertinent information. The University believes the carrying amount of these financial instruments is a reasonable estimate of fair value. For those investments that
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are not traded on a ready market, the estimates of their fair value may differ from the value that would have been used had a ready market for those investments existed.
Investment income, as well as realized and unrealized gains and losses, are accounted for within unrestricted net assets, or as changes in temporarily or permanently restricted net assets if so stipulated by the donor of such assets.
Investment return up to the institutions approved spending rate is presented as endowment support within operating revenue and other support. Endowment support is calculated based upon the Total Rate of Return methodology noted below in Pooled Assets. The difference between that amount and the actual total return (which may be positive or negative) is presented in non-operating revenues and expenses.
Pooled Assets
The University manages two separate investment pools designated as Pool A and Pool D. Pooled investments and allocation of pooled investment income are accounted for using the unit market value method.
The Total Rate of Return methodology is utilized for Pool A which consists primarily of quasi and true endowment funds. The annual total payout is calculated based on an approved spending rate that is applied to a five-year monthly average market value of Pool A funds. For fiscal years 2018 and 2017, the approved spending rate was 5.0%.
Pool D is the charitable gift annuity reserve pool and is invested in accordance with California State Insurance Commission requirements.
Endowment
The University’s endowment consists of 497 individual donor-restricted endowment funds and 74 University-designated quasi-endowment funds for a variety of purposes. The net assets associated with endowment funds, including funds designated by the University to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions.
The University has interpreted the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) as allowing the University to appropriate for expenditure or accumulate so much of an endowment fund as the University determines is prudent for the uses, benefits, purposes, and duration for which the endowment funding is established, subject to the intent of the donor as expressed in the gift instrument. As a result of this interpretation, the University classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift. The remaining portion of donor-restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the University in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the University considers the following factors in making a determination to appropriate or accumulate endowment funds:
1) The duration and preservation of the fund
2) The purposes of the University and the donor-restricted endowment fund 3) General economic conditions
4) The possible effect of inflation and deflation 10
5) The expected total return from income and the appreciation of investments 6) Other resources of the University
7) The investment policies of the University Derivatives
From time to time, the University enters into derivative transactions either as part of its overall investment asset allocation or as a specific hedge or risk management tool. Derivatives used as part of the asset allocation strategy are recorded at fair value with realized and unrealized gains and losses reflected in the Consolidated Statements of Activities. These derivatives are included in the investment portfolio categorized as “Other.”
Derivatives used to economically hedge specific operations, such as foreign currency contracts, are discussed under the heading, “Foreign Currency Management.”
Assets Held As Trustee or Agent and Trust and Agent Obligations
The University uses the actuarial method of recording charitable gift annuities and charitable remainder trusts. When a gift is received, the fair value of the gift received is recorded as an asset and the present value of the related amounts due is recorded as a liability based on the Individual Annuity Reserve 2012 tables and the remainder is recorded as private gift and grant revenue in the appropriate net asset category on the Consolidated Statements of Activities. Investment income is credited, and annuity payments, direct costs of funds management, and investment losses are charged to the related liability.
In situations where trust assets are not readily convertible to cash, annuitant payments have been made by the University. For life contingent gifts, the liability is adjusted annually based on the changes in the expected life, and is reflected as an adjustment of the actuarial liability on the Consolidated Statements of Activities. At July 31, 2018 and 2017, the discount rate used to calculate future payments to be made by the University ranged from 1.8% per annum to 10.6% per annum.
Remainder interests in real estate are recorded at their estimated fair value at the date of gift.
Investment income and gains are credited, and direct costs of asset management and investment losses are charged to the related net asset category.
The University and its consolidated subsidiaries have legal title, either in their name or as trustee, to the charitable gift annuities, charitable remainder trusts, and life estates subject to life interests of the beneficiaries. No significant financial benefit can be realized until the contractual obligations are released.
Deferred Compensation Plans
Contributions to the University’s deferred compensation plan under Section 457(b) and 457(f) of the United States Internal Revenue Code are carried at fair value as a component of assets held as trustee or agent, with an equal and offsetting obligation to pay the employees as a component of trust and agency obligations on the Consolidated Statements of Financial Position.
Property, Facilities and Equipment
Property, facilities and equipment are stated at cost or, if received by gift, at fair value at the date of the gift. Depreciation on buildings, improvements, furniture, fixtures, and equipment is provided on a straight-line basis over the estimated useful lives as described in the table below:
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Asset Class Useful Life
Furniture and Other Equipment 10-15 years
Computer Hardware and Software 2-10 years
Motor Vehicles 5 years
Buildings 20-70 years
Land Improvements 20 years
Amounts spent for repairs and maintenance are charged to expense as incurred. When assets are sold or retired, the associated cost and accumulated depreciation are removed. Any gain or loss from such disposition is recorded as a component of revenues and other support and expenses on the Consolidated Statements of Activities.
Debt Issuance Costs
Capitalized debt issue costs included in long-term obligations are amortized over the life of the related debt using the effective interest method.
U.S. Government-Funded Student Loans
Funds provided by the United States government under the Federal Perkins Loan Program are loaned to qualified students and may be loaned again after their collection. These funds are ultimately refundable to the U.S. government and as such are included as liabilities in the Consolidated Statements of Financial Position.
Foreign Currency Management
The University uses derivative financial instruments to reduce its net exposure to currency fluctuations. As such, the University enters into forward contracts and purchases currency futures (principally the Euro, the British pound, and Swiss francs) to economically hedge forecasted cash flows denominated in foreign currencies. The purpose of the University’s foreign currency hedging activities is to reduce the risk of eventual United States dollar net cash outflows resulting from costs outside the U.S. that will be adversely affected by changes in exchange rates.
Asset Retirement Obligations
The University recognizes liabilities for legal obligations associated with the retirement of tangible long-lived assets when the timing and/or method of settlement of the obligation is conditional on a future event. The fair value of a liability for a conditional asset retirement obligation is recognized in the period in which it occurs if a reasonable estimate of fair value can be made
Reclassifications and Revisions
Certain amounts were reclassified at, or for the year ended July 31, 2017, to conform with the current year’s presentation.
In 2018, there were certain errors identified in the previously issued 2017 Consolidated Financial Statements, specifically related to the misclassification of net realized and unrealized (gains) on investments in the Statement of Cash Flows and certain other misclassifications in the Statement of Cash Flows and Statement of Activities. In evaluating whether its previously issued Consolidated Financial Statements were materially misstated, the University considered the guidance in Accounting Standards
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Codification (“ASC”) Topic 250, Accounting Changes and Error Corrections, ASC Topic 250-10-S99- 1, Assessing Materiality, and ASC Topic 250-10-S99-2, Considering the Effects of Prior Year Misstatements when Quantifying Misstatement in Current Year Financial Statements. In addition, there were certain disclosure errors identified. The University has concluded that these classification and disclosure errors were not material to the 2017 Consolidated Financial Statements however has revised the 2017 Consolidated Financial Statements to reflect the correction of these errors, the effects of which are detailed below.
Adjustments to reflect corrections of errors to the Non-operating Revenues and Expenses section of the Consolidated Statement of Activities for the year ended July 31, 2017 are shown below:
(In thousands)
As Issued Adjustments to Revised Temporarily Permanently As revised Unrestricted Unrestricted Unrestricted Restricted Restricted Total NON-OPERATING REVENUES AND EXPENSES
Actuarial adjustment of trust and agency obligations… $ - $ - $ - $ (2,962) $ (1,140) $ (4,102) Investment income:
Dividends………...……… 5,848 - 5,848 2,374 3 8,225
Interest……… 1,467 - 1,467 529 42 2,038
Other……….… 4,724 7,820 12,544 - - 12,544
Investment expenses……… (4,540) - (4,540) (2,204) - (6,744)
Net realized and unrealized investment gains………… 47,832 - 47,832 14,646 8,817 71,295
Foreign currency translation……… 216 - 216 - - 216
Other……… (3,064) (7,820) (10,884) (8,554) 2,479 (16,959)
Total non-operating revenues and expenses……… $ 52,483 $ - $ 52,483 $ 3,829 $ 10,201 $ 66,513
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PEPPERDINE UNIVERSITY
N ot es t o C ons ol ida te d F ina nc ia l S ta te m ent s
Adjustments to reflect corrections of errors to the Consolidated Statement of Cash Flows fo ended July 31, 2017 are shown below: (In thousands) As issued Adjustments As r CASH FLOWS FROM OPERATING ACTIVITIES 2017 Change in net assets……… $ 105,641 $ Adjustments to reconcile change in net assets to net cash and cash equivalents provided by operating activities: Depreciation and amortization……… 20,803 - Provision for doubtful accounts……… -- Loss on early extinguishment of debt……… -- Non-cash gifts……….……… (10,051) - Actuarial adjustment of trust and agency obligations………………………… 4,102 - Contributions restricted for long-term investment……… (3,389) - Income restricted for long-term investment……… (76) - Premium received on issuance of long-term obligations……………………… -- Loss on disposal of property, facilities and equipment………………………… 224 - Net realized and unrealized (gains) losses on investments…………………… (71,295) (34,456) Change in assets and liabilities: Student receivables……… 974 - Other accounts receivable………..……… (2,803) - Beneficial interests and contributions receivable………...… 10,298 - Prepaid expenses, inventories and other assets……………….…………… (360) - Accounts payable and accrued liabilities……….……… (2,444) - Accrued salaries and wages……… 400 - Student deposits, advance payments and deferred revenue………………… 2,956 - Net cash and cash equivalents provided by operating activities…………… 54,980 (34,456) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of investments……… 108,356 170,095 Purchases of investments……… (114,970) (127,505) Purchases of property, facilities and equipment……… (46,535) - Student loans repaid……… 3,818 - Student loans issued….…..…...……… (3,508) - Net cash and cash equivalents used in investing activities………………… (52,839) 42,590 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from contributions restricted for long-term investment……… 3,899 - Income restricted for long-term investment……… 76 - Principal received on issuance of long-term obligations……………………… -- Principal payments on long-term obligations……… (3,135) - Net change in bond issue costs……… -- Increase (decrease) in U.S. government-funded student loans……………… 290 - Investment activity on annuities……… 6,535 (8,134) Payment of trust and agency obligations……… (5,245) - Net cash and cash equivalents provided by financing activities…………… 2,420 (8,134) Net change in cash and cash equivalents………………………………… 4,561 - Cash and cash equivalents at beginning of year………………………………… 139,895 - Cash and cash equivalents at end of year……… $ 144,456 $ -$ 14
Details on investment return were omitted from the investment footnote (Note 6) for 2017. The details on investment return for the year ended July 31, 2017 are shown below:
2017 (In thousands) Investment income ... $ 22,807 Realized gains ... 62,372 Unrealized gains... 43,378
$128,557
Adjustments to reflect corrections of errors to the changes in endowment net assets (Note 7) for the year ended July 31, 2017 are shown below:
(In thousands) Adjustments
As Issued to Revised
Unrestricted Temporarily Temporarily Temporarily Permanently As revised Principal Restricted Resticted Resticted Restricted Total
Endowment net assets, beginning of year $ 398,863 $ 53,099 $ - $ 53,099 $ 329,379 $ 781,341
Investment income 5,166 2,902 - 2,902 3 8,071
Net realized and unrealized -
appreciation 39,351 53,118 (7,820) 45,298 8,893 93,542
Private gifts and grants 15 56 - 56 4,448 4,519
Maturation of Assets Held as Trustee -
or Agent - - - - 2,162 2,162
Endowment support (1,394) (38,520) 7,820 (30,700) (76) (32,170)
Reinvestments and transfers 5,370 (4) - (4) 3,615 8,981
Expenditures (3,909) (2,204) - (2,204) - (6,113)
Total endowment net assets, end of year $ 443,462 $ 68,447 $ - $ 68,447 $ 348,424 $ 860,333
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3. Student Receivables
Student receivables consist of the following at July 31, 2018 and 2017:
2018 2017
(In thousands) Graziadio School of Business and Management… $1,475 $1,641 Seaver College. ... 1,561 981 Graduate School of Education and Psychology... 584 312 Other ... 529 113 Gross student receivables ... 4,149 3,047 Allowance for doubtful accounts... (1,587) (1,460)
$2,562 $1,587 Activity in the allowance for doubtful accounts was as follows:
For the year ended July 31,
2018 2017
(In thousands) Beginning balance ... $1,460 $1,506 Provision for doubtful accounts... 200 - Accounts charged off... (217) (263) Recoveries of previously charged off accounts 144 217
Net recoveries/(charge-offs) ... (73) (46) Ending balance ... $1,587 $1,460
4. Student Loans
Student loans consist of the following at July 31, 2018 and 2017:
2018 2017
(In thousands) Perkins. ... $13,300 $14,381 Weingart ... 6,789 6,782 Other ... 1,005 924
Gross student loans. ... 21,094 22,087 Allowance for loan losses... (1,578) (1,466)
$19,516 $20,621
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